(4) Generating Long Term Demand Of Shares In The Market
It is one of the most significant goals of a company behind shares buyback strategy. Individual stocks are known to trade depending on the supply and demand of shares in the market.
When the demand of shares is high as compared to supply then the stock price is likely to increase. Similarly, when the supply of shares is low as compared to the demand then also stock price is likely to increase.
Shares buyback strategy is a great way to affect supply-demand dynamics of shares of underlying company. As the company repurchases its own shares, the supply of shares in the market gets reduced without affecting the demand.
As a result, the share price is likely to appreciate due to automatic reduction of supply. Finally, stock price is likely to be increased or affected as long as buyback operations continue.
Therefore, when a shares buyback is announced, stock prices tend to shoot up. It is due to increased participation of investors to take the advantage of higher demand & lower supply.
Thus, when shares buyback is done from open market then it greatly adds to the long-term demand for shares of underlying company.
(5) Preventing Hostile Takeover Of Underlying Company
It is one of the most important goals of a company behind shares buyback strategy. Business takeover is the act of buying one company (the target) by another company (the acquirer, or bidder).
It is often considered as the beauty of corporate world. But, every takeover is not friendly in nature.
Sometimes, hostile takeovers may also occur. Hostile takeover allows a bidder to takeover a target company even when its management is not willing to agree for the same.
Generally, companies that have accumulated excessive amounts of cash on the balance sheet are more attractive targets for takeover. It is due to the fact that accumulated cash of the company can be used to pay down the debt incurred to carry out the hostile takeover.
In this situation, shares buyback strategy helps to reduce accumulated cash into a lean cash position. Simultaneously, shares buyback boost the stock price to a much higher level.
As a result, making a takeover becomes more expensive for the hostile bidders. Thus, shares buyback plays a great role in minimizing the possibility of hostile takeovers.
- Reasons Behind Company’s Buyback Offer: Shutterstock